Yes, it's most annoying. It should probably warn against using an important password.
It does. The subscription form says: "You may enter a privacy password below. This provides only mild security, but should prevent others from messing with your subscription. Do not use a valuable password as it will occasionally be emailed back to you in cleartext."
You can turn off the password reminder in your preferences at http://mail.wikipedia.org/mailman/options/wikimediauk-l to prevent the monthly reminder.
Angela.